“Annual tax on enveloped dwellings” (ATED) – penalties for late returns – are they valid?

11 October 2021

New Quadrant partner Paul Davidoff explores the vagaries of “Annual tax on enveloped dwellings” (ATED), the complexities of compliance and the potential penalties of late filing.

“Annual tax on enveloped dwellings” (ATED) – penalties for late returns – are they valid?

It was once quite common for UK residential property to be owned through a non-UK company, where the buyer was domiciled outside the UK.  There used to be both inheritance tax and capital gains tax advantages in doing this – advantages which are now, to all intents and purposes, gone. There have also been reasons for holding UK residential property through a UK company.  Indeed, while there are still some good reasons why a property might be held in the name of a company (whether a UK company or non-UK company), it can be quite disadvantageous to do so where the property is not let to a third party.  This is because of the “annual tax on enveloped dwellings” (ATED) charge which has applied since 2013 – initially on properties worth over £2m, but now for properties worth £500,000 or more.  If the property is commercially let to an unconnected third party, there is normally an exemption from the ATED charge.

Where they are required, ATED returns have to be filed with HMRC by the end of April each year, even if an exemption applies – the exemption has to be expressly claimed. 

However, if the company holding the UK residential property is not a UK company, it is quite possible that its directors will not even have been aware of their ATED compliance obligations.  When they eventually learn of their obligations and file the requisite overdue returns, they may find that HM Revenue & Customs impose daily penalties from 3 months after each filing date.  If there is any ATED due, additional penalties may be charged.

Consequently, many who thought that they did not have to file a return, because an exemption applied, will be in for a shock when they discover that, not only do they have to file annual ATED returns dating back, perhaps, to 2013, but also that HMRC will levy penalties for late submission of the returns even where there was no ATED to pay.  These penalties could amount to thousands of pounds for each return filed over a year late, quite apart from any penalties in respect of late paid tax, which could be very substantial indeed.  If the failure to report was deliberate, even higher penalties could apply.

Are those penalties validly levied?

There have been two recent cases in the First Tier Tax Tribunal where the taxpayer company had failed to file ATED returns by the applicable deadline.  Eventually, in each case, the company realised and then filed the outstanding return(s) without prompting from HMRC. 

HMRC can impose a daily penalty where they know a return has not been submitted by three months after the deadline.  However, in each case, HMRC had not known that there was an outstanding ATED return – after all, it can be very difficult for them to know – and they only became aware when the return was submitted. 

The legislation provides that HMRC must notify the taxpayer of the date from which the penalty is payable – ie a future date (according to the tribunal judge), but since the return will no longer be outstanding at that future date (because HMRC did not find out about the late filing until after the return had been submitted), the tribunal concluded that HMRC was not permitted to issue a penalty notice and penalties for days prior to any notice could not be levied.

HMRC did not appeal these decisions, but issued a statement that they considered the tribunal to have been wrong.  In other words, they refuse to accept those decisions. 

Then came a further case on the same point and, this time, the tribunal found in favour of HMRC, noting the decisions of the earlier two cases, but then saying that they were decided wrongly. 

Interestingly, both of the earlier two decisions were made by the same tribunal judge, but the latter made by a different judge. 

Where are we now?

Any company submitting late ATED returns without prompting from HMRC should still expect to receive a penalty notice, backdating the penalties to three months (normally) after the relevant deadline.  The taxpayer is, of course, free to challenge the decision and hope that their case is heard by the former tribunal judge and not the latter (unless the former has now changed their mind!).  

As for “legal precedent”, the cases are contradictory and none of them is binding on HMRC or the First Tier Tax Tribunal.  An Upper Tribunal decision will be needed for that (which is perhaps why HMRC did not appeal the earlier two decisions) and that is likely to happen only where (a) the taxpayer loses at the first tier level and (b) there is enough money at stake for the taxpayer to consider it worth taking the matter further.

Concluding comments

Importantly, whilst ATED applies to most companies which hold UK residential property, it does not always apply and it is important to be clear about the UK tax position first. Many properties are held by companies purely as a nominee, or the company may be acting as a trustee: this may mean that ATED does not apply at all.  If that is the case, it may also change the liability to other taxes in respect of the property, in particular income tax, capital gains tax and inheritance tax.

If you are concerned that your company have been remiss in its ATED compliance, or if you think that you may have been paying ATED when you should not have been, please contact Paul Davidoff or Darren Austin-Smith to discuss your situation further.